Albert F

Peter is correct about deferring to the plan terms. When plans are confronted with estate beneficiaries, they often want to pay to the estate fiduciaries, who may be determined by local law. Such law may provide for summary procedures that permit specified persons to become the personal representative of the estate. In those cases the small estate affidavit goes to the court which issues a certificate of authority that the plan may defer to in the same way as it would defer to letters testamentary for executors and letters of administration for other personal representatives. See e.g. NY SCPA 1304

Dear Peter, David is correct, it would be prudent to check the extent, if any, to which account balances may affect the administration fees, including rollover fees, all of which I suspect will be relatively small Regardless of whether there are any rollovers, I would verify who will be responsible for maintaining the plan documents after the accounts are moved to Ascensus, and if the documents will change, check whether there will be any substantive changes in the plan documents, including beneficiary terms. If so, some additional work may be required to keep the designations consistent. The plan is not one-person plan, thus not an ERISA plan. I would check local law to see if there are significant differences in rights of your friend’s creditors depending on whether the funds are in an IRA or in the plan accounts. Best wishes, Albert

Dear Lucky 32, Let me try to reconcile Peter and Lou’s comments. The regulation question pertaining to optional benefits Peter referred to was introduced by 53 FR 26058 (July 11, 1988). That regulation provided a transition permitting the elimination of optional benefits generally on or before first day of the first plan year after January 1, 1989, 26 C.F.R. § 1.411(d)-4, Q & A 8(c)(1) and 9(c)(2)). Thus, these optional benefits could once be eliminated, but it is no longer possible to do so. Albert

Dear Cathyw, My practice when this occurs is to recommend using the VCP rather than wait for an IRS audit, which I admit is quite rare. Before doing the filing, I seek all the interim amendments, which is usually feasible when the original document provider is still in place. If the provider has changed, it is often not feasible to get all the documents. In such case I would include an explanation of the efforts that were made in the filing. Katie is correct different reviewers require different good faith efforts, but my sense is the preference is for all interim amendments, so I prefer to present to frame discussion with our good faith efforts rather than let the reviewer frame that discussion. I would not do a pre-submission conference, because they are not binding, so you will not learn whether the reviewer assigned to the VCP filing will demand all or some of the amendments or the requisite due diligence. Pre-submission conferences are most appropriate when you want to know whether a VCP submission will be entertained, not when you are more interested in the precise terms of the required correction. Good luck. Best wishes, Albert

My remarks about actuarial equivalents only apply to defined benefit plans. There is no similar provision for defined contribution plans which also need not worry about qualification failures stemming from excessive benefit distributions

Let me add some observations to the above very thoughtful analysis. Under the ECPRS and general fiduciary principles administrators of tax-qualified plans, such as the one Mr. Gulia described, should establish and maintain administrative practices and procedures to ensure that these plans are operated properly in accordance with the Code’s qualification requirements. Those requirements include the requirement that such plans make the Code §401(a)(9) required minimum distributions. Thus, qualified plan administrator should have a procedure in place to determine annually which plan participants, if any, are required to receive RMDs and to make distributions to any such individuals. This procedure should include verifying whether any participants are in excess of the applicable RMD age, which as Mr. Zeller observes depends on the participant’s birthday. If the plan provides that payments are made regardless of whether the participant retires, the administrator must act to make such payments to comply with the plan terms, which is also a plan qualification requirement. Such plan provisions do not violate Code §401(a)(9). If the plan provides, as described above, that the plan payments need not be made until the participant retires, there would have to be another plan provision providing that payments must begin to be made at the applicable RMD age if the participant was a 5-percent owner in such year. The plan administrator would then have to determine if this exception governs. Many plans, however, take an intermediate approach and provide that plan distributions must begin on the April 1 following the year in which the participant reaches age 70.51 regardless of whether the employee has retirement. Otherwise, IRC § 401(a)(9)(C)(iii) requires that the annual benefit be increased to the actuarial equivalent of the benefit that was accrued as of the date the employee attained age 70.5. There may be tax qualification issues with plans allows such increases without limit. In particular, IRC § 401(a)(16) prohibits annual benefits in excess of the Code §415(b) limits of 100% of the participant’s high average compensation. Thus, the administrator may wish to compare Jane’s annual plan benefit with her high average compensation. 1 To avoid actuarial equivalent increases, the payments would have had to begin on January 1, 1997, if the employee attained 70.5 prior to January 1, 1997. See Treas. Reg. §1.401(a)(9)-6-A-7). Best wishes, Albert

You may want to look at the August 2022 discussion of a similar question. Best wishes, Albert

Dear Centerstage, Treas. Reg. 29 CFR § 2510.3-3 would appear to provide that the one-person corporation you represented and that Trisports represents is not an ERISA plan. Thus, I don’t understand how the federal courts has jurisdiction to decide anything about the plan. If court intervention is required, it would thus appear only the state courts will have the requisite jurisdiction. Which court depends on the state, although the fact that the decedent’s estate is trying to obtain the pension benefits suggests that Peter is correct and the court that appointed the executor will be the appropriate court. I remain dubious about going to a court to appoint the plan administrator and trustee, which right is almost certainly granted to the executor as the successor owner of the plan sponsor under the plan terms or seeking a declaration confirming the authority of the plan administrator and trustee appointed by the executor. If court action is needed it seems more prudent to file a complaint, petition, or order to show cause, asking why the custodian or financial institution should not be compelled to distribute the plan benefits to the decedent’s executor as directed by the plan administrator appointed by the plan sponsor, and to pay the costs and attorney fees of the action. The executor would be in a stronger position to avoid authority questions from any custodian or financial institution, if the decedent’s will authorized the decedent’s executor to appoint the plan administrator and trustee for any plans sponsored by the decedent’s or any wholly-owned entity of the decedent. In such case, the court decree accepting the probate of the will would clearly give the executor. This also addresses the possibility that none of the successor administrators or successor trustees appointed by the decedent are available at the time at issue. Best wishes, Albert

Dear Centerstage, Congratulations on your success. Thanks for the clarification of the underlying facts. As with Trisports, the plan beneficiary is the estate. In the estate's litigation against the Plan was the defendant, who were the papers served upon. Did the complaint assert that the plan was an ERISA plan? Best wishes, Albert

Dear Centerstage, Is this a similar fact pattern? How did the financial institution react to this default judgment? Albert

Dear Trisports, It is not uncommon for a sole proprietor who maintains a tax-qualified defined contribution plans, such as 401(k) plans to act as the plan administrator and trustee and fail to make provision for successors if the proprietor is unable to perform the tasks associated with those positions. The plan administrator is generally responsible for plan beneficiary determinations, notifying plan beneficiaries of such determinations and authorizing plan distributions to beneficiaries who request benefit distributions. Plan trustees other than those who act essentially as custodians are generally responsible for the investment of plan assets, although they may delegate such authority in part. It is also not unusual for financial institutions and advisors with control of the plan assets to be reluctant to relinquish control of the plan assets in those situations. It is prudent to verify the agreements those parties have with the plan. The agreements usually require them to follow the instructions of the duly appointed plan administrator and plan trustee. The institutions and advisors often lack good procedures for accepting successor trustees and administrators, but tend to accept such instructions from the sole proprietors with little question, particularly if the proprietor is willing and able to confirm the instructions. Tax-qualified plan documents usually have provisions for choosing successor plan administrators. The plan sponsor is usually given the authority to make such choices. The estate generally steps into the shoes of the sole proprietor sponsoring the plan on the death of the proprietor. Thus, the estate’s personal representative may nominate a successor plan administrator and plan trustee, and if the nominees accept the offices, they will be duly authorized to exercise the powers of those offices. In practice, it often takes considerable time after the proprietor’s death before a personal representative of the estate is appointed and recognizes the need to appoint these plan fiduciaries. One would expect an opinion of plan counsel that the successor plan administrator and trustee have been duly appointed to be accepted by the financial institution or advisor, which will then defer to those fiduciary’s instructions. Unfortunately, this does not always occur, in which case the plan will have to seek a court order, generally from a state court, directing the financial institution and advisor to show cause why they should not be compelled to follow the instructions of the duly appointed plan administrator and duly appointed trustee and to pay the plan’s attorney fees for having to pursue this matter.

Many thoughtful advisors , like Luke and Rather be Golfing, find the statute ambiguous. This suggests two other solutions to the conundrum. Why not ask the IRS to address the examples I presented or any other examples that other observers find troubling? We could then determine if the IRS stands by its safe harbor approach in such cases. Why not ask Congress to clarify the statute?

I do not agree that Bird was wrong. IRS Notice 2020-50 presents what it characterizes as a safe harbor approach and an alternative approach for determining the level payment amortization schedule if a plan loan borrower takes advantage of the delay in plan loan dates between March 27, 2020 and December 31, 2020. I agree with Luke that the safe harbor approach is easy peasy to use, as is the alternative that Bird focused on. However, neither approach is consistent with the CARES Act, as can be seen by changing the safe harbor example slightly. The Notice’s safe harbor example seems to assume that plan loan payments that were otherwise due on the final day of each month between July 1, 2020 and December 31, 2020 were all suspended. This would imply six monthly payments were suspended. a) Assume the loan would otherwise have been paid in full on December 31, 2020. There would seem to be little question about the new level payment amortization schedule. Six monthly payments would be due on the final day of each month between July 1, 2021 and December 31, 2021. The required payments would be increased by the interest that accrued during the one-year delay. However, the safe harbor approach generates a different level payment amortization schedule. Twelve smaller monthly payments would be due on the final day of each month between January 1, 2021 and December 31, 2021. That violates the requirement of CARES Act, §2202(b)(2)(A) that those due dates be each extended by 1 year. In contrast, the alternative approach presented by the IRS yields the correct level amortization schedule. b) Assume the loan would otherwise have been paid in full on January 31, 2021. It is far from clear how to determine the new level payment amortization schedule. However, the safe harbor approach would generate the following level payment amortization schedule. Thirteen smaller monthly payments would be due on the final day of each month between January 1, 2021 and January 31, 2022. That again violates the one-year extension requirement of CARES Act, §2202(b)(2)(A). The alternative approach presented by the IRS would generate the following level payment amortization schedule. The original required January 31, 2021 payment requirement would be unchanged, and the same six monthly payments that were due on the final day of each month between July 1, 2021 and December 31, 2021 under the earlier hypothetical would still be due. However, I suspect the reason Bird believes this is crazy is because it violates the requirement of CARES Act, §2202(b)(2)(A) that “any subsequent payments with respect to any such loan be adjusted” to reflect payment delays and interest accruals. Thus, if the law is not amended plan advisors are left with a conundrum. Do we advise our clients to follow guidance of the IRS, which is the agency responsible for enforcing the loan repayment provisions even though such guidance is not consistent with statute? If we wish to advise following the guidance, do we recommend using the safe harbor, the alternative approach, or a reasonable approach that is consistent with the statute?

Let me add two nuances. An individual qualifies for a coronavirus-related distribution as defined under Section 2202 of the CARES Act under three circumstances. Only one requires that the individual have suffered adverse financial consequences. An individual, however, who has been diagnosed with the virus SARSCoV—2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention, qualifies for such a distribution even if the individual did not suffer any adverse financial consequences. An individual, whose spouse or dependent has been so diagnosed similarly qualifies for such a distribution even if the individual did not suffer any adverse financial consequences. Lois is correct. The IRS takes the position in Answer 11 that she cites that if a plan sponsor knows that an individual does not qualify for a coronavirus-related distribution the sponsor may not rely on such certification.

Correct, I did my calculations like the bankers who make arm’s length loans. Correct, I used a standard amortization schedule. I assumed payments were made as of the end of each period, and that payments were made on January 31, February 29, March 31, and April 30. I computed the principal balance as of April 30 to be $9,222.37 and then accrued interest for eight months until the next payment was made nine months later on January 31, 2021 rather than on May 31, 2020. I did incorrectly describe $9,222.37 as the balance as of May 31, but the concept is more important than the precise number. One could do similar calculations with payments on the first of the month, or whenever payroll payments are made. The difficulty with the two alternatives that Mr. Richter and some of you have presented to the IRS approach set forth in [IRS Notice 2005-92, 2005-2 C.B. 1165, 1171-72 Example is that they contradict either the limit of suspensions to payments otherwise due in 2020 or the level amortization requirement of Code Section 72(p)(2)(C), both of which are set forth in the CARES Act.. I agree with Mr. Richter that “Participants need to understand the impact of the delay of repayments (a participant is not required to suspend repayments and could continue to make repayments on the loan).” It is the administrator’s fiduciary responsibility to give the participants and beneficiaries a notice describing that impact, which requires an explanation of how the borrower’s payments would change if the borrower decided to defer future payments. It would be an invitation to litigation to fail give such an explanation.